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Former U of M faculty Sargent, Sims win Nobel economics prize

STOCKHOLM (AP) — Americans Thomas Sargent and Christopher Sims
won the Nobel economics prize on Monday for research that sheds
light on the cause-and-effect relationship between the economy and
policy instruments such as interest rates and government spending.

Sargent and Sims - both 68 - carried out their research
independently in the 1970s and '80s. But it is highly relevant
today as world governments and central banks seek ways to steer
their economies away from another recession.

"It is not an exaggeration to say that both Sargent's and Sims'
methods are used daily ... in all central banks that I know of in
the developed world and at several finance departments too," Nobel
committee member Torsten Persson told the AP.

The Royal Swedish Academy of Sciences said the winners have
developed methods for answering questions such as how growth and
inflation are affected by a temporary increase in the interest rate
or a tax cut.

"Today, the methods developed by Sargent and Sims are essential
tools in macroeconomic analysis," the academy said in its
citation.

Sargent is a professor at New York University, Sims a professor
at Princeton. Both taught at the University of Minnesota; Sims was on the U of M's
economics faculty from 1970 to 1990 while Sargent taught there from
1971 to 1987. University President Eric Kaler says the university's faculty
are "beyond excited" for their former colleagues.

Sims told a news conference in Stockholm by telephone that he
was sleeping when he got the call from the prize committee and that
he had not expected to win.

Christopher SimsAP Photo/Julio Cortez

"Actually, at first we were called twice, and my wife couldn't
find the talk button on the phone, so we went back to sleep," he
said.

Sims said there was no easy way in which his work could help
resolve the current financial turmoil.

"I don't have any simple answer, but I think the methods that I
have used and Tom has developed are central to finding our way out
of this mess," he added. "I think they point a way to try to
unravel why our serious problems develop and new research using
these methods may help us lead us out of it."

Asked how he would invest his half of the 10 million kronor
($1.5 million) award, given the turbulence of today's financial
markets, Sims said: "First thing I'm gonna do is keep it in cash
for a while and think."

Sargent told The Associated Press he was surprised by the award,
and he hadn't yet thought of how to celebrate it.

"I'm just going to teach my classes. I teach two classes today.
I don't know if that's a celebration," he said by phone, preparing
his notes for class on a train about to depart from New York to
Princeton, where he is teaching macroeconomics this semester.

He didn't think the Nobel would change his life. "I hope not at
all. I'm going to work and keep doing what I do. I like what I
do," he said.

The academy said Sargent showed how "structural
macroeconometrics" can be used to analyze permanent changes in
economic policy - a method that can be applied to study how
households and companies adjust their expectations concurrently
with economic developments.

Sims developed a method based on so-called "vector
autoregression" to analyze how the economy is affected by
temporary changes in economic policy and other factors, like an
increase in the interest rate, the academy said.

"Sargent has primarily helped us understand the effects of
systematic policy shifts, while Sims has focused on how shocks
spread throughout the economy," the academy said.

The winners developed models to measure the sometimes surprising
ways that people respond to changes in economic policy.

"People form their own ideas about what's going to happen
independently of what the economists say is going to happen," said
David Warsh, who writes the blog Economic Principles.

Warsh gave a simple example of the kinds of things Simms and
Sargent shed light on: Suppose a government imposes a tax on corn
to raise more money. Consumers might confound the government's plan
by substituting wheat for corn - and causing tax revenue to drop
instead of rise.

The winners' use of complicated economic models usually keeps
them a step or two removed from the pressing economic and political
issues of the day. But Warsh says they contributed to the models
being used now to determine whether governments should be cutting
deficits or spending more money to lift the economy out of its rut.

And Sargent famously weighed in on the fight against inflation
in the early 1980s. Many economists believed it would take years of
high interest rates to bring inflation down. But Sargent believed
that inflation could be tamed much faster if the Federal Reserve
acted decisively enough to break the public's expectations that
prices would continue to rise rapidly.

That is basically what happened: Then-Fed Chairman Paul Volcker
raised interest rates so quickly and so much that inflation
expectations were shattered.

NYU said Sargent, who is married with three adult children, is
an advisor to the Federal Reserve Banks of Minneapolis, San
Francisco, and Chicago and has had an ongoing involvement with the
National Bureau of Economic Research.

His current work involves developing models to understand
persistently high European unemployment rates; using new
statistical methods to characterize the changing behavior of the
Fed since WWII and the changing responsiveness of the U.S. economy
to Fed actions; and applying techniques of robust control from
engineering to optimal policy and the study of individual behavior,
the university said.

The economics prize capped this year's Nobel announcements. The
awards will be handed out Dec. 10 - the anniversary of prize
founder Alfred Nobel's death. The economics prize is not among the
original awards established in Nobel's 1895 will but was created in
1968 by the Swedish central bank in his memory.

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Associated Press writers Paul Wiseman in Washington, D.C., Ula
Ilnitzky in New York and Louise Nordstrom in Stockholm contributed
to this report.